Dec
01
2025
The Black Scholes Model, Explained

The Black-Scholes Model, Explained

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on The Black-Scholes Model, Explained

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

The Black-Scholes option pricing model is a mathematical formula used to calculate the theoretical price of an option. It’s a commonly-used formula for determining the price of contracts, and as such, can be useful for investors in the options market to know.

But there are some important things to know about it, such as the fact that the model only applies to European-style options.

Key Points

•   The Black-Scholes model is a mathematical formula used to calculate the theoretical price of an option.

•   It is commonly used for pricing options contracts and helps investors determine the value of options they’re considering trading.

•   The model takes into account factors like the option’s strike price, time until expiration, underlying stock price, interest rates, and volatility.

•   The Black-Scholes model was created by Myron Scholes and Fischer Black in 1973 and is also known as the Black-Scholes-Merton model.

•   While the model has some assumptions and limitations, it is considered an important tool for European options traders.

What Is the Black-Scholes Model?

As mentioned, the Black-Scholes model is one of the most commonly used formulas for pricing options contracts. The model, also known as the Black-Scholes formula, allows investors to estimate the value of options they’re considering trading.

The formula takes into account several important factors affecting options in an attempt to arrive at a theoretical price for the derivative. The Black-Scholes options pricing model only applies to European options.

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💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The History of the Black-Scholes Model

The Black-Scholes model gets its name from Myron Scholes and Fischer Black, who created the model in 1973. The model is sometimes called the Black-Scholes-Merton model, as Robert Merton also contributed to the model’s development. These three researchers were affiliated with the Massachusetts Institute of Technology (MIT) and University of Chicago.

The model functions as a differential equation that requires five inputs:

•  The option’s strike price

•  The amount of time until the option expires

•  The price of its underlying stock

•  Interest rates

•  Volatility

Modern computing power has made it easier to use this formula and made it more popular among those interested in stock options trading.

The model is designed for European options, since American options allow contract holders to exercise at any time between the time of purchase and the expiration date. By contrast, European options may be priced differently and only allow the owner to exercise the option on the expiration date. So, while European options only offer a single opportunity to exercise, American option traders may choose any of the days up until and on expiration to exercise the option.

Recommended: American vs European Options: What’s the Difference?

What Does the Black-Scholes Model Tell?

The main goal of the Black-Scholes model is to estimate the theoretical price of a European-style contract, giving options traders a benchmark to compare against market prices. To this end, the model goes deeper than simply looking at the fact that the price of a call option may increase when its underlying stock price rises and incorporates the impact of stock volatility.

The model looks at several variables, each of which may impact the value of that option. Greater volatility, for example, could increase the option’s theoretical value since it may have a higher chance of seeing larger price moves. Similarly, more time to expiration may increase the model’s estimate of the option ending in the money, and may lower the present value of the exercise price. Interest rates also influence the price of the option, as higher rates can make the option more expensive by decreasing the present value of the exercise price.

The Black-Scholes Formula

The Black-Scholes formula estimates the theoretical value of a call option or put option using inputs such as current stock price, time to expiration, volatility, and interest rates. It expresses the value of a call option by taking the current stock prices multiplied by a probability factor (d1) and subtracting the discounted exercise payment times a second probability factor (d2).

Explaining in exact detail what d1 and d2 represent can be complex. They are part of the mathematical process used to estimate option prices in the market, and are often debated.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Why Is the Black-Scholes Model Important?

The Black-Scholes option pricing model is so impactful that it once won the Nobel Prize in economics. Some consider it a foundational idea in financial history.

Some traders use the Black-Scholes model to estimate theoretical values of European options. Since its creation, many scholars have elaborated on and improved this formula. The model is widely recognized as a landmark in mathematical finance.

Some analysts argue that the model has contributed to greater pricing efficiency of options and stock markets. While designed for European options, the Black-Scholes model can still offer insights into how theoretical option values respond to changes in core pricing factors, which may help inform investors’ overall options trading strategies.

Some traders use the model hedge against portfolio risk, which they believe may improve overall market efficiency. However, others assert that the model has increased volatility in the markets, as more investors constantly try to fine tune their trades according to the formula.

How Accurate Is the Black-Scholes Model?

Some studies have shown the Black-Scholes model to be effective at estimating theoretical options prices. This doesn’t mean the formula has no flaws, however.

The model tends to underestimate the value of deep in-the-money calls and overestimate calls that are deeply out of the money.

That means the model might assign an artificially low value to options that are significantly in the money, while it may overvalue options that are significantly out of the money. Options tied to stocks yielding a high dividend may also get mispriced by the model.

Recommended: How Do Dividends Work?

Assumptions of the Black-Scholes Model

There are also a few assumptions made by the model that can limit its real-world accuracy. Some of these include:

•  The assumption that volatility and the risk-free rate remain constant over the option’s life

•  The assumption that stock prices move continuously and without sudden jumps

•  The assumption that a stock doesn’t pay dividends during the option’s life

Such assumptions are necessary to simplify the model, even though they may negatively impact results. Relying on assumptions makes the model mathematically tractable, as only so many variables can reasonably be calculated.

Over the years, quantitative researchers have expanded on the original models to address limitations introduced by its assumptions.

This leads to another flaw of the Black-Scholes model: unlike other inputs in the model, volatility must be an estimate rather than an objective fact. Interest rates and the amount of time left until the option expires are concrete numbers, while volatility has no fixed numerical value.

The best a financial analyst can do is estimate volatility using something like the formula for variance. Variance is a measurement of the variability of an asset, or how much its price changes from time to time. One common measurement of volatility is the standard deviation, which is calculated as the square root of variance.

Test your understanding of what you just read.

The Takeaway

The Black-Scholes option-pricing model is among the most influential mathematical formulas in modern financial history, and it may be one of the most accurate ways to determine the theoretical value of a European call option. It’s a complicated formula that has some drawbacks that traders should be aware of, but it’s a useful tool for European options traders.

Given the Black-Scholes model’s complexity, it’s likely that many investors may never apply it directly in their trading decisions. That doesn’t mean it isn’t important to know or understand, of course, but many investors may not get much practical use out of it unless they delve deeper into options trading.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is an example of the Black-Scholes method?

An example would be using the Black-Scholes formula to estimate the theoretical value of a European call option on a stock trading at $100, with a $105 strike price, 30 days to expiration, 20% volatility, and a 5% risk-free rate. The model would help determine the option’s theoretical worth under these conditions.

What is the 5 step method of Black-Scholes?

The five steps typically include: identifying the input values (stock price, strike price, time to expiration, volatility, and risk-free rate), calculating d1 and d2 (which are probability factors), finding the cumulative normal distribution values of d1 and d2, plugging the values into the Black-Scholes formula, and interpreting the result as the option’s theoretical price.

Is Black-Scholes still used?

Yes, the Black-Scholes model remains widely used as a foundational pricing tool for European options. Many traders and financial institutions still use it, though modifications or alternative models may be applied in complex or non-standard scenarios.

Why are Black-Scholes so important?

The Black-Scholes model helped transform how options are priced by offering a standardized, mathematically grounded method. Some argue that it has helped to improve market efficiency and risk management and pave the way for the modern derivatives market.

Photo credit: iStock/akinbostanci

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q325-076

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Nov
20
2025

How Much a $450,000 Mortgage Will Cost You

By | Family Finances, Home Ownership, mortgage | Comments Off on How Much a $450,000 Mortgage Will Cost You

A $450K mortgage payment is between $2,700 and $4,000 per month in the current interest-rate environment, depending on your loan type and term. This amount, however, does not include other variables that affect your payment, such as property taxes and insurance. Here’s the lowdown on what you can expect.

Key Points

•   A $450,000 mortgage payment typically ranges from $2,700 to $4,000 per month, influenced by factors like loan term and interest rate.

•   Property taxes, home insurance, and homeowners association fees can add to the payment amount.

•   Opting for a 15-year mortgage over a 30-year mortgage significantly reduces the total interest paid but means making higher monthly payments.

•   To qualify for a $450,000 mortgage, a strong credit score, stable income, and low debt-to-income ratio are needed.

•   Homebuyers should compare lenders’ offers, look at the cost of different loan types, and use a mortgage calculator to estimate costs before committing to a home loan.

Cost of a $450,000 Mortgage

A $450K mortgage payment is primarily influenced by your loan term and interest rate. A 30-year loan at 6.40% interest would result in a monthly cost of $2,815 (not including taxes and insurance). But a 15-year loan at the same interest rate would have monthly payments of $3,895.

💡Quick Tip: SoFi’s Lock and Look + feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

Monthly Payments for a $450,000 Mortgage

The amount you pay each month for a $450,000 mortgage payment is going to be somewhere between $2,700 and $4,000. However, keep in mind that there are a few variables that affect your monthly payment. These include:

•   Interest rate

•   Fixed or variable interest rate

•   Length of repayment period (10, 15, 20, or 30 years)

•   Mortgage insurance

•   Property taxes

•   Property insurance

Another thing to consider are homeowners association (HOA) fees. Although they are paid directly to the HOA and shouldn’t affect your monthly mortgage payment, these fees are an additional living expense.

If you’re a first-time homebuyer, it’s important to understand the true cost of owning a home because your monthly payment is more complicated than simply the amount you borrow. Housing costs and property taxes, for example, vary based on location. If you’re open to where you live, you may want to compare the cost of living by state. The best affordable places to live in the U.S. may pique your interest!

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.

Where to Get a $450,000 Mortgage

Banks, credit unions, and online lenders can all provide you with a $450,000 mortgage. Make sure you shop around and compare lenders to get the lowest interest rate. As you apply, you’ll receive loan estimates that show the cost of a loan. While the annual percentage rate (APR) is certainly important, also compare expenses such as the loan origination fee and mortgage insurance.

What to Consider Before Applying for a $450,000 Mortgage

Before applying for a $450,000 mortgage, consider the cost difference between a shorter loan repayment period and a longer loan repayment period. For a 30-year mortgage with a 7.00% interest rate, the total interest paid during the life of the loan would be $627,791.

For a 15-year mortgage with the same interest rate, you would have a higher monthly payment, but the total amount you would pay in interest would be more than halved: just $278,050. For an extra $1,050 each month, a 15-year loan would save $349,739 in interest compared to a 30-year loan.

If you can’t afford a 15-year mortgage now, just remember that you can always do a mortgage refinance in the future.

$450,000 mortgage with a term of 30 years and a 7% interest rate:

Year Beginning Balance Monthly Payment Total Interest Paid Total Principal Paid Remaining Balance
1 $450,000 $2,993.86 $31,355.19 $4,571.14 $445,428.86
2 $445,428.86 $2,993.86 $31,024.74 $4,901.59 $440,527.26
3 $440,527.26 $2,993.86 $30,670.41 $5,255.93 $435,271.33
4 $435,271.33 $2,993.86 $30,290.45 $5,635.88 $429,635.45
5 $429,635.45 $2,993.86 $29,883.04 $6,043.30 $423,592.15
6 $423,592.15 $2,993.86 $29,446.17 $6,480.17 $417,111.98
7 $417,111.98 $2,993.86 $28,977.71 $6,948.62 $410,163.36
8 $410,163.36 $2,993.86 $28,475.40 $7,450.94 $402,712.43
9 $402,712.43 $2,993.86 $27,936.77 $7,989.57 $394,722.86
10 $394,722.86 $2,993.86 $27,359.20 $8,567.13 $386,155.73
11 $386,155.73 $2,993.86 $26,739.88 $9,186.45 $376,969.27
12 $376,969.27 $2,993.86 $26,075.79 $9,850.54 $367,118.73
13 $367,118.73 $2,993.86 $25,363.70 $10,562.64 $356,556.09
14 $356,556.09 $2,993.86 $24,600.12 $11,326.21 $345,229.88
15 $345,229.88 $2,993.86 $23,781.35 $12,144.98 $333,084.90
16 $333,084.90 $2,993.86 $22,903.39 $13,022.95 $320,061.95
17 $320,061.95 $2,993.86 $21,961.96 $13,964.38 $306,097.58
18 $306,097.58 $2,993.86 $20,952.47 $14,973.86 $291,123.71
19 $291,123.71 $2,993.86 $19,870.01 $16,056.32 $275,067.39
20 $275,067.39 $2,993.86 $18,709.30 $17,217.04 $257,850.35
21 $257,850.35 $2,993.86 $17,464.68 $18,461.66 $239,388.69
22 $239,388.69 $2,993.86 $16,130.08 $19,796.25 $219,592.44
23 $219,592.44 $2,993.86 $14,699.01 $21,227.33 $198,365.12
24 $198,365.12 $2,993.86 $13,164.48 $22,761.85 $175,603.27
25 $175,603.27 $2,993.86 $11,519.03 $24,407.31 $151,195.96
26 $151,195.96 $2,993.86 $9,754.62 $26,171.71 $125,024.25
27 $125,024.25 $2,993.86 $7,862.67 $28,063.67 $96,960.58
28 $96,960.58 $2,993.86 $5,833.94 $30,092.39 $66,868.19
29 $66,868.19 $2,993.86 $3,658.56 $32,267.77 $34,600.41
30 $34,600.41 $2,993.86 $1,325.92 $34,600.41 $0

$450,000 mortgage with a term of 15 years and 7% interest rate:

Year Beginning Balance Monthly Payment Total Interest Paid Total Principal Paid Remaining Balance
1 $450,000 $4,044.73 $30,942.64 $17,594.09 $432,405.91
2 $432,405.91 $4,044.73 $29,670.76 $18,865.97 $413,539.94
3 $413,539.94 $4,044.73 $28,306.94 $20,229.79 $393,310.15
4 $393,310.15 $4,044.73 $26,844.52 $21,692.20 $371,617.94
5 $371,617.94 $4,044.73 $25,276.39 $23,260.34 $348,357.61
6 $348,357.61 $4,044.73 $23,594.90 $24,941.83 $323,415.78
7 $323,415.78 $4,044.73 $21,791.85 $26,744.87 $296,670.91
8 $296,670.91 $4,044.73 $19,858.46 $28,678.26 $267,992.64
9 $267,992.64 $4,044.73 $17,785.31 $30,751.42 $237,241.23
10 $237,241.23 $4,044.73 $15,562.29 $32,974.44 $204,266.79
11 $204,266.79 $4,044.73 $13,178.56 $35,358.16 $168,908.62
12 $168,908.62 $4,044.73 $10,622.52 $37,914.21 $130,994.41
13 $130,994.41 $4,044.73 $7,881.70 $40,655.03 $76,144.79
14 $76,144.79 $4,044.73 $4,942.74 $43,593.99 $31,524.68
15 $31,524.68 $4,044.73 $1,791.33 $46,745.40 $0

It’s important to understand how costs vary between the different types of mortgage loans.

How to Get a $450,000 Mortgage

To get a $450,000 mortgage, you need a strong credit score, a steady source of income, and a low debt-to-income ratio. Other tips to qualify for a mortgage include things like saving up for a higher down payment and submitting all of the appropriate paperwork to your lender in a timely manner. If you’re just starting out on your home buying journey, a home loan help center may be a good resource. “As you work your way toward a down payment for a house, setting a goal can be a sound step toward making it a reality. A mortgage calculator can help you estimate how much you can borrow, let you play with different down payment options, and view how much your monthly mortgage payments might be,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.


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💡Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

The Takeaway

Payment on a $450,000 mortgage is influenced by a few different variables, such as your loan term and interest rate. Other factors that come into play include mortgage insurance, property taxes, and property insurance. A higher down payment and a stronger credit score may help lower your monthly payment.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much is a $450K mortgage a month?

A $450,000 mortgage should cost you around $2,700 to $4,000. Just remember to also include property taxes and insurance in your calculations.

How much income is required for a $450,000 mortgage?

You probably need to earn around $140,000 a year to afford a $450,000 mortgage. A general guideline is that all of your housing costs should be at or below 30% of your gross income. Assuming you opt for a 30-year loan, your mortgage payment, property tax, and insurance cost would total around $3,200 per month. Factor in a budget for utilities and repairs and your total annual cost would be $42,000 — that’s 30% of $140,000.

How much is a down payment on a $450,000 mortgage?

A conventional loan requires a down payment of at least 3%. Therefore, your down payment should be, at minimum, $13,500. A down payment of 20% ($113,000 on a property costing $563,000) would allow you to skip paying the additional cost of private mortgage insurance.

Can I afford a $450K house with a $70K salary?

It’s not likely that someone earning $70,000 per year could afford a $450,000 house. Assuming you choose a 30-year loan, your monthly payment would be around $3,000, which would be more than 50% of your gross income — well over the 30% that is considered the maximum amount you should spend on housing. The only way to make it work would be to have a large down payment (more than $150,000) to lower the amount you would have to borrow and thus your monthly payments.

Photo credit: iStock/AntonioGuillem

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Qualifying for the reward requires using a real estate agent that participates in HomeStory’s broker to broker agreement to complete the real estate buy and/or sell transaction. You retain the right to negotiate buyer and or seller representation agreements. Upon successful close of the transaction, the Real Estate Agent pays a fee to HomeStory Real Estate Services. All Agents have been independently vetted by HomeStory to meet performance expectations required to participate in the program. If you are currently working with a REALTOR®, please disregard this notice. It is not our intention to solicit the offerings of other REALTORS®. A reward is not available where prohibited by state law, including Alaska, Iowa, Louisiana and Missouri. A reduced agent commission may be available for sellers in lieu of the reward in Mississippi, New Jersey, Oklahoma, and Oregon and should be discussed with the agent upon enrollment. No reward will be available for buyers in Mississippi, Oklahoma, and Oregon. A commission credit may be available for buyers in lieu of the reward in New Jersey and must be discussed with the agent upon enrollment and included in a Buyer Agency Agreement with Rebate Provision. Rewards in Kansas and Tennessee are required to be delivered by gift card.

HomeStory will issue the reward using the payment option you select and will be sent to the client enrolled in the program within 45 days of HomeStory Real Estate Services receipt of settlement statements and any other documentation reasonably required to calculate the applicable reward amount. Real estate agent fees and commissions still apply. Short sale transactions do not qualify for the reward. Depending on state regulations highlighted above, reward amount is based on sale price of the home purchased and/or sold and cannot exceed $9,500 per buy or sell transaction. Employer-sponsored relocations may preclude participation in the reward program offering. SoFi is not responsible for the reward.

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SOHL-Q425-183

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Nov
19
2025
What is a Glide Path?

Guide to Glide Paths for 401(k)

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Glide Paths for 401(k)

Asset managers use a “glide path” to determine how the asset allocation of a target-date retirement fund will change based on the number of years until the fund’s target date. Each target-date fund has its own glide path, though they typically begin with a more aggressive allocation that gets more conservative over time.

The idea behind most target date fund glide paths is that investors with a longer-term time horizon have a higher percentage of their portfolio in riskier assets, like stocks, since they have time to recover from short-term volatility. As their retirement date approaches (or once they’ve started retirement), investors likely will benefit from a more conservative portfolio that protects the assets they’ve already accumulated.

Key Points

•   A glide path adjusts asset allocation of a target-date retirement fund, reducing risk as retirement approaches.

•   Target-date funds with glide paths are common investment choices in 401(k) plans and IRAs.

•   Glide paths can be declining, static, or rising, each with distinct risk and return profiles.

•   Selecting the right glide path depends on personal risk tolerance and retirement goals.

•   “To” glide paths become conservative at retirement, while “Through” glide paths keep some risk for potential growth at retirement and beyond.

What Is a Glide Path?

The glide path is the formula that asset managers choose when they put together a target-date mutual fund that determines how and when that portfolio will adjust its asset allocation over time.

Target-date funds (and their glide paths) are common investment choices in 401(k) accounts, as well as in other types or retirement accounts, such as a Roth or traditional IRA set up through a brokerage account.

A key component to saving for retirement is having a suitable mix of investments. Early on, most glide paths focus on stocks that typically offer the greatest potential to grow in value over time and then shift to bonds and other fixed-income investments according to the investor’s risk tolerance to manage volatile price swings as they get closer to retirement.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Understanding Glide Path

The glide paths within target-date funds aim to create a set-it-and-forget-it investing option for retirement savers, who may get a mix of assets based on their time horizon within a single fund. Investors who are younger and have 20 to 30 years until retirement may have a higher allocation toward riskier assets like stocks.

By comparison, someone who is nearing retirement or has already retired, may need to consider scaling back on their portfolio risk. Glide path investing automatically reallocates the latter investor’s portfolio toward bonds which are typically lower risk investments with lower returns compared to stocks, but are more likely to provide increased portfolio stability. That also generally means that younger investors in a target-date fund will typically have higher 401(k) returns than older investors.

Types of Glide Paths for Retirement Investing

There are different glide path strategies depending on an investor’s risk tolerance and when they plan to retire. Typically, target-date funds have a declining glide path, although the rate at which it declines (and the investments within its allocation) vary depending on the fund.

Declining Glide Path

A declining glide path reduces the amount of risk that a target-date fund takes over time. In general, it makes sense for retirees or those approaching retirement to reduce their investment risk with a more conservative portfolio as they age. A decreasing glide path is the more common approach used. It involves a higher equity risk allocation that steadily declines as retirement approaches.

Static Glide Path

Some target-date funds may have a static glide path during some years. During this time, the investment mix would remain at a set allocation, such as 60% stocks and 40% bonds. Managers maintaining portfolios that have a static glide path rebalance them regularly to maintain this allocation.

Rising Glide Path

In this approach — which goes against most financial professionals’ recommendations — a portfolio initially has a greater allocation of bonds compared to stocks, and then gradually increases its shares of equities. For example a portfolio might start out with 70% bonds and 30% stocks, and reverse those holdings over a decade to 70% equities and 30% bonds. The rising glide path approach generally takes the position that increasing risk in a retiree’s portfolio could reduce volatility in the early stages of retirement when the portfolio is at risk of losing the most wealth in the event of a stock market decline.

While an increasing glide path may be an option to consider for some retirees with pension benefits or those who are working in retirement — that is, as long as they understand the risk involved and feel comfortable taking it on — generally speaking, the rising glide path is the least utilized method for retirement planning, and it is not commonly recommended by financial advisors.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Choosing the Right Glide Path

If you’re saving for retirement in a 401(k), there may only be one target-date option available to you based on your target-retirement age. However, if you have choices within your 401(k) or you’re choosing a target-date fund within an individual retirement account or another investment vehicle, you can look for a target-date fund with a strategy that aligns with your investment view.

One rule of thumb uses the “rule of 100,” which subtracts the investor’s age from 100 to determine the percentage of your portfolio that should be in stocks. However, some managers use glide paths that decline more or less quickly than that.

Some target-date funds also incorporate alternative assets, such as private equity or real estate, in addition to traditional stocks and bonds.

“To” or “Through” Retirement

When glide paths reach retirement date, they can take one of two approaches, either a “To” or “Through” approach. A “To” retirement glide path is a target-date fund strategy that reaches its most conservative asset allocation when retirement starts. This strategy generally holds lower exposure to risk assets during the working phase and at the target retirement date. This means, at retirement, it reduces exposure to riskier assets, like equities, and moves into more conservative assets, like bonds.

“Through” glide paths tend to maintain a somewhat higher allocation toward riskier assets at their target retirement date, which continues to decrease in the earlier retirement years. This means exposure to equities in retirement tends to be higher, at least in the first few years of retirement.

In choosing which path is best suited to you, you must determine your risk tolerance and how aggressive or conservative you are able to be. This includes deciding how much exposure to equities you can afford to have. Decreasing exposure to stocks means investors may not have to worry as much about a portfolio that fluctuates in value, whereas an increased exposure to equities may mean a portfolio with more volatility that could have potential for greater gains, and potentially higher losses, over time.

The Takeaway

Glide paths are formulas that investment managers create to determine the level of risk in a target-date fund. The idea behind a glide path is that a portfolio automatically adjusts itself based on risk tolerance that changes as the investor ages, allowing for a more hands-off approach.

Glide paths are common investment choices in retirement accounts such as 401(k)s and IRAs. As you’re determining your retirement savings strategy, carefully consider whether they may make sense for you.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

What does glide path approach mean?

A glide path refers to a formula that asset managers use to determine the allocation mix of assets in a target-date retirement portfolio and how it changes over time. A target-date retirement portfolio tends to become more conservative as the investor ages, but there are multiple glide paths to take into account a retiree’s risk tolerance.

What is a retirement glide path?

A retirement glide path is the approach within a target-date fund that includes a mix of stocks and bonds. Retirement glide paths typically start out with a more aggressive mix of investments and get more conservative over time.

Which type of mutual fund follows a glide path?

Target-date retirement funds are the most common type of mutual fund that follows a glide path. However managers may also use glide paths for other time-focused, long-term investments.

What is an example of a glide path?

Here is one example of a glide path: Say an investor plans to retire in 2050 and buys a target-date 2050 fund. If the investor is using a declining glide path strategy, it will automatically reduce the amount of risk that the target-date fund takes over time. So, for instance, the target-date fund might have 70% stocks and 30% bonds at the beginning, but over time, the amount allocated to stocks will steadily decline, and the amount allocated to bonds will steadily increase — making the portfolio more conservative as the investor approaches retirement.

What are the benefits of a glide path?

Potential benefits of a glide path may include making investing easier because the process of changing asset allocation is automatic, and allowing for an essentially hands-off approach since glide paths are professionally managed. However, there are drawbacks to consider, as well, including possibly higher management fees for some target-date funds.

Photo credit: iStock/akinbostanci

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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19
2025
How to Sell Options for Premium

How to Sell Options for Premium

By | Growing Wealth, invest, Investing | Comments Off on How to Sell Options for Premium

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Options traders may sell (or write) options with the hope of profiting from the premium they receive in return. Options premiums are the fee that options buyers (or holders) pay to purchase an options contract, giving them the option — though not the obligation — to buy or sell an asset at a specific price by a set date.

Unlike options holders, option writers are obligated to fulfill the terms of an options contract in exchange for the premium they receive, which could expose them to the risk of seeing substantial losses, well beyond losing the premium they receive.

While option writing has the potential to generate profits, it’s an advanced investment strategy typically used by traders experienced with risk management techniques.

Key Points

•   Selling options generates income via writing call or put contracts, collecting upfront payments.

•   Factors affecting option premiums include stock price, time value, and implied volatility.

•   Potential losses if the option is exercised represent a significant risk.

•   Retaining premiums and assets is a benefit if options are not exercised.

•   Financial advice is crucial before trading options due to their complexity and risk.

What Is An Option Premium?

An option premium is the price an option buyer pays to purchase a contract based on its upfront market cost. A seller, conversely, receives the premium upfront as compensation. In other words, it is the current market price of an option contract, and the amount the seller receives when someone purchases the contract.

When investors buy options contracts, they are purchasing a derivative instrument that gives them the right to trade the underlying asset represented by the contract at a specific price within a predetermined period of time. The premium is paid to the option writer at the time of sale, regardless of whether the buyer exercises the option.

The premium amount depends on how much time there is left until the option contract expires, the price of the underlying asset, and how volatile or risky it is.

Recommended: How To Trade Options: A Guide for Beginners

What Is Selling Options Premium?

Many investors may be familiar with the concept of purchasing an option contract, but on the other side of the market are the sellers who generate income through the premiums they receive from buyers.

Selling options is an options trading strategy in which an investor sells a buyer the right to purchase or sell an asset (typically a stock) at a predetermined price by the option’s expiration date. The premium is collected upfront as payment for the seller taking on the risk that the price of the underlying asset may move in the buyer’s favor during the contract’s term. The premium is not refundable.

If the option expires worthless, and the buyer isn’t able to exercise their right to buy or sell the underlying asset, the seller gets to keep the premium as profit, as well as retain ownership of the underlying asset (in the case of call options).

However, if the option ends up “in the money” for the buyer, the seller could incur a loss, since they’ll have to sell the stock for less than (or buy it for more than) its market price.

How Is an Options Premium Calculated?

The main factors that affect an option contract price are its intrinsic value, as determined by the stock price and strike price, implied volatility, and time value. Options sellers receive premiums upfront when a buyer purchases a call or a put option.

When an option buyer looks at options contract prices, they receive a per share quote, but each contract typically represents 100 shares of the underlying stock. Buyers will decide to either buy call or put options, depending on how they expect the stock’s price to perform in the future.

For example, a buyer could decide to purchase a call option. The seller offers it to them for a $4 premium. If the buyer purchases one contract, which represents 100 shares of that stock, they would pay $400 for it. If the buyer never executes the contract (because the price of the stock doesn’t move in their favor before the contract expires), the seller may keep the full $400 premium as compensation.

Stock Price

If an option buyer purchases a call option, they are hoping the underlying stock price increases, whereas if they buy a put option they hope it decreases. When the stock price goes up, the call option premium tends to increase and the put option premium tends to decrease. When the stock price falls, the call premium decreases and the put premium increases.

Recommended: What Makes Stock Prices Go Up or Down?

Intrinsic Value

The intrinsic value of an option is the difference between the current underlying stock price and the option’s strike price. This difference is referred to as the “moneyness” of the option, where the intrinsic value of the option is a measure of how far in the money the option is.

If the price of the underlying asset is higher than the option’s strike price, a call option is in the money, making it worth more and priced higher. If the stock price is lower than the option’s strike price, this makes a put option in the money and worth more. If an option is out of the money, it has no intrinsic value.

Time Value

Time value is the portion of the option’s premium that exceeds its intrinsic value due to time remaining before expiration. If the option has a longer timeframe left until its expiration date, it has more time to potentially move beyond the strike price and into the money. That makes it more valuable because it gives the investor more time to exercise their right to trade for a potential gain. The decrease in time value over time is called time decay.

The closer the option gets to expiring, the more rapidly time value erodes (and time decay increases). The value of the options contract declines over time due to time decay, which can be a risk for buyers. Options buyers want the stock to move enough, and soon enough to increase the option’s value before time decay reduces it. On the other hand, options sellers want the premium to decrease, which happens with every day that goes by.

Time value, sometimes referred to as extrinsic value, is calculated by subtracting intrinsic value from the option’s premium.

Implied Volatility

High premium options often reflect securities with higher volatility. If there is a high level of implied volatility, it suggests the underlying asset may experience larger price swings in the future, making the option more expensive.

A low level of implied volatility can make the option premium lower. It may benefit buyers to consider options with steady or increasing volatility, because this can increase the chance of the option reaching the desired strike price. Those who are selling options may prefer lower volatility because it may reduce the risk of large price swings, and could create an opportunity to buy back the option at a reduced price.

Other Factors

Other factors that influence option premium prices include:

•   Current interest rates

•   Overall market conditions

•   The quality of the underlying asset

•   Any dividend rate associated with the underlying asset

•   The supply and demand for options associated with the underlying asset

Options Premiums and the Greeks

Certain Greek words are associated with types of risks involved in options trading. Traders can look at each type of risk to figure out which options they may consider trading, and how those trades might respond to factors like price changes, volatility, or time decay.

•   Delta: The sensitivity of an option price to changes in the underlying asset

•   Gamma: The expected rate of change in an option’s delta for each point of movement of the underlying asset

•   Theta: The rate at which an option’s price decays over time

•   Vega: A measure of the amount the option’s price may change for each 1% change in implied volatility

•   Rho: The expected change in an option’s price for a one percentage point change in the risk-free interest rate

The Takeaway

Options are one type of derivatives that give the buyer the right, but not the obligation, to buy or sell an asset. To sell options for a premium, options writers must consider several factors that could influence the option’s premium value. Selling options for premium is potentially a strategy that may allow sellers to generate income. However, given that option writing has the potential to result in substantial losses, it should only be undertaken by experienced traders.

While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

How do you sell options to collect premium?

To sell options to collect premium, a trader writes call or put contracts and receives payment upfront from the buyer. This strategy involves agreeing to buy or sell a stock if the buyer exercises the option by expiration. Common strategies include covered calls and cash-secured puts.

What happens to the premium when you sell an option?

When an option is sold, the premium is paid upfront to the seller. If the seller holds the position to expiration and the contract is not exercised, they may keep the full amount. But if they close the position early by buying it back, the final result depends on the repurchase price.

What is the premium when you sell an option?

The premium when selling options is the amount a buyer pays for the contract. It compensates the seller for taking on the obligation to buy or sell the underlying asset if the option is exercised.

How is the premium of an option determined?

An option’s premium is based on intrinsic value, time value, implied volatility, and the price of the underlying stock. The final premium reflects current market expectations of risk and time until expiration.

Photo credit: iStock/sefa ozel

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Nov
13
2025
Two men and a girl on a couch with a laptop, possibly discussing the difference between will and estate planning.

The Difference Between Will and Estate Planning

By | Insurance, Life & Career, money | Comments Off on The Difference Between Will and Estate Planning

Estate planning and creating a will both involve an uncomfortable topic – thinking about what will happen to your money when you die – but they are separate concepts. Broadly speaking, a will is a specific legal document stipulating exactly how your assets will be distributed on your death and who will care for any dependents. Creating that document is what you may hear referred to as will planning.

Estate planning, on the other hand, is an umbrella term that covers all aspects of end of life documentation and decision making, which can include a will. Estate planning also allows you to say how you want your assets divided after your death and can help you transfer those assets in the most tax-advantageous way possible for your loved ones.

Estate planning documents, including power of attorney and living will forms, are often created as part of the estate planning process. These help ensure that your wishes are followed, even if you are medically incapacitated. (You can also access these as part of will planning; we’ll cover that in a minute.)

Creating a will and estate planning may sound complicated, but in some cases, they can be done relatively quickly, often using online templates. In other cases, it may be advisable to have an attorney manage the process.

Key Points

•   A will outlines asset distribution and guardianship for minors and pets.

•   Estate planning encompasses broader end-of-life decisions, including tax strategies.

•   Wills and estate plans can be created online or with legal assistance.

•   Trusts help minimize probate and control asset distribution effectively.

•   Revocable living trusts offer flexibility and control over assets.

What Is Will Planning?

Writing a will usually refers to a very specific task: A will details where you want your assets to go at your death, and who you would like to serve as guardian of your minor children. If you have pets, it may also spell out who will care for them and how. Additionally, a will names an executor. This is the person you are putting in charge of distributing your assets to the right individuals or charities.

In most cases, you’ll be creating what is called a testamentary will, which is signed in the presence of witnesses. This is often considered a good way to protect your decision against challenges from family members and/or business colleagues after you’re gone. While you can write this kind of will yourself, you may want to have it prepared by an attorney who specializes in trusts and estates, to ensure that it complies with your state’s laws. Or look for an online business that customizes its work to your location.

When you are creating a will, you may look into preparing other related documents that are usually part of estate planning. For example, you may be able to add a power of attorney form and a medical directive or living will.

Fast, Secure, and Easy Estate Planning.

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Together, these documents spell out who can handle matters on your behalf if you were to come mentally or physically incapacitated. If you aren’t planning on pursuing estate planning, these are important documents to complete when creating your will. (Even young people have sudden illnesses and accidents, so these forms are an important part of adulthood.)

Many online will templates provide for these additional documents, so that your bases are covered if the worst were to happen. Creating a legal will can cost anywhere from $0 to hundreds or thousands of dollars, depending on whether you do it yourself or if you work with an attorney.

Recommended: How Much Does Estate Planning Cost?

Even if you die with a will in place, it’s likely that the document will go through probate — the legal process in which an executor to the will is formally named and assets are distributed to the beneficiaries you have named in your will. Yes, there are nightmare stories about the probate process, but don’t get too stressed about it. In general, if an executor (an individual appointed to administer the last will and testament of a deceased person) is named in your will and your will is legally valid, the probate process can be relatively streamlined.

Recommended: What Happens If You Die Without a Will?

What Is Estate Planning?

Estate planning can be the umbrella term for all end-of-life decision making, but it’s more often used to describe your plan for how you want your property divided when you die and the financial implications of those decisions. It can involve creating the following:

•   Will/trusts to smooth the transfer of assets/property

•   Durable and healthcare power of attorney

•   Beneficiary designations

•   Guardianship designations

Estate planning aims to make sure that your loved ones receive the maximum proceeds possible from your estate.

Often, estate planning is done with the oversight of an attorney, who can provide strategies for how to minimize tax burdens for your beneficiaries when you die.

Recommended: What Is Estate Planning? A Comprehensive Guide

Who Needs an Estate Plan?

When people talk about estate planning, they may be referring to the decision to create a trust. Trusts can be especially beneficial for high-net-worth individuals who may be worried about tax implications of their heirs inheriting their belongings. But they also have a role in less wealthy families. If your clan has a beloved lake house that you want to stay in the family, for future generations, a trust might be a possibility to investigate.

Recommended: New Parent Estate Planning

These arrangements allow a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries and can help avoid the time-consuming process of probate. Trusts may also be beneficial for people who have dependents in their care, as well as those who may worry about how their beneficiaries will spend the money bequeathed to them.

There are two other scenarios in which a trust can be very helpful:

•   People with a pet who have a specific plan of how they wish the pet to be cared for after their death. (Pets can’t own property, so leaving money to pets in a will can cause a legal headache. This can be sidestepped by creating a trust for Fluffy’s care.)

•   Those who want to minimize ambiguity in who gets what, which could be helpful in the case of people who have had multiple marriages.

The most common type of trust within an estate plan is called a revocable living trust. This may also be called a living trust because, while you are alive, you can name yourself a trustee and have flexibility to make changes. These can often be created online, although an attorney can certainly be involved, guiding the process and answering any questions.

In setting up a trust, you will name a trustee. This is a person in charge of overseeing the trust according to the parameters you state. Unlike a will, where an executor will ensure beneficiaries get the property stated, a trust allows the creator to put guardrails around gifts — and for the trustee to ensure the guardrails are followed.

For example, you can specify in a trust that certain assets do not go to a beneficiary until they reach a certain age or milestone.

Recommended: Do I Need a Trust?

Taking the Next Step in Will Writing and Estate Planning

There’s a lot of overlap between “creating a will” and “creating an estate plan,” and that ambiguity can lead to difficulty beginning the process. But creating a legal will, including guardianship documents for minor children, can be a good first step. Also, make sure you have power of attorney forms in place and any advanced directives. These can guide decision-making on your behalf if you were ever mentally or physically incapacitated.

Then, you can have peace of mind and can “ladder up” to creating a more complex plan that encompasses more what-ifs. Estate planning, with the possibility of trusts and transfers, can complete your end-of-life planning.

The Takeaway

Creating a will and an estate plan are two different ways to address your end of life wishes. A will is a document that says who inherits what and how you want minors, dependents, and even pets cared for. It may have additional documents that spell out your wishes if you become incapacitated.

An estate plan, however, is a more comprehensive way to spell out the allocation of your assets after you die. It typically includes finding ways to make the process run more smoothly, quickly, and with lower tax payments for your beneficiaries. Starting the process now, whether with online templates or by consulting with an attorney, is important. While no one likes to think about worst-case scenarios, the sooner you get the paperwork done, the better protected your loved ones will be.

When you want to make things easier on your loved ones in the future, SoFi can help. We partnered with Trust & Will, the leading online estate planning platform, to give our members 20% off their trust, will, or guardianship. The forms are fast, secure, and easy to use.

Create a complete and customized estate plan in as little as 15 minutes.

Photo credit: iStock/AnnaStills

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q425-024

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